This invention is a method and apparatus which provides an integrated financial product package together with a system of exchange, investment and borrowing that incorporates personal financial analysis, planning and management. This invention is realized, in the preferred embodiment, on a fault tolerant computer system with an operating system capable of real-time on-line transaction processing, and will be described in such context. It will be understood, however, that the invention may be applied in numerous other contexts, and variant forms, and offers benefits to consumers and producers of financial services other than those specifically referred to herein.
Historically, consumers have conducted most of their exchange transactions through non-electronic means. The use of non-electronic means of exchange requires manual record keeping in order to collect, collate, and analyze data on the sources and uses of funds. This has resulted in substantial expenditures for accounting by virtually all consumers. For example, at the end of each month many consumers try to: compile records of the amount of cash paid to providers of goods and services, balance their check book and collate all their credit card receipts and compare them to statements received from each card issuer. The consumer then determines whether she is over, under, or on budget. Despite a proliferation of personal financial management software in recent years, no means have been developed to eliminate the time and expense of data collection and entry or to enhance on-line financial management.
Banks and other financial intermediaries have offered consumers only standardized financial service products. The standardization of financial products reduced data processing and marketing costs for financial institutions, but resulted in financial services that were often ill-suited for consumers. For example, mortgage lending against homes has been practiced for many years, but only very recently have several new financial products been introduced in an effort to make mortgage lending more attractive to financial institutions, and to make housing more affordable to prospective homeowners. Additionally, many of the terms of the financial service products are fixed and inflexible. These products have not afforded consumers the ability to alter their consumption, investment or savings behavior to best suit their own or the economy's changing circumstances.
Moreover, product proliferation in the financial services market has presented the consumer with a confusing array of choices without a convenient, objective or clearly documented means of selecting the best combination of financial services to realize the consumer's financial objectives. Individual purveyors of financial services have often solicited customers and marketed their products on an ad hoc basis. Financial institutions usually possess only limited knowledge of the customer's total financial condition and hence they often try to sell a product that is most advantageous to the institution, not the customer. Moreover, at the present time customers must spend a substantial amount of time coordinating and monitoring their holdings of many different financial services from many different suppliers. In essence, consumers today are required to be the systems integrator for the disparate data processing systems of their financial providers. Few individuals have the time, interest or ability to perform this difficult task well.
Despite the development of some new financial products, such products have not succeeded in meeting the goals of either the mortgagor or the financial institutions. For example, financial institutions have traditionally lent funds to individuals on a fully secured basis, with an interest rate greater than their cost of funding the loan. In the last few years, however, the financial industry has been deregulated making it possible for a variety of financial institutions and firms that market financial services (hereinafter referred to as "financial institutions") to sell an entire range of financial products. Thus, in addition to the traditional objectives of a mortgagee, many financial institutions now view mortgage lending as a vehicle to encourage the borrower to purchase one or more financial service products. Methods are needed, however, to facilitate the provision of one or more financial services in an efficient and comprehensible manner.
From the point of view of the consumer, problems remain concerning the relative inflexibility of financial service products. Rapidly changing international, domestic, and personal economic circumstances require flexibility in financial service products. This allows the consumer the ability to adjust her asset and liability holdings and the terms of financial obligations to take best advantage of such changing circumstances. Many financial service products were developed at a time when it would have been impossible for a financial intermediary to offer customized, derivative or synthetic financial service products (hereinafter referred to as "derivative products") to individual consumers. With the advent of recent significant advances in information technology, it is possible for financial intermediaries to offer derivative financial service products to individual consumers in accordance with the individual's financial resources, forecast future income and expenses, and attitude toward investment risk.
For example, consider the relative inflexibility of the traditional fixed rate mortgage. (Here, "mortgage" means the entire relationship between the financial institution and the borrower: the loan, the security interest and the contractual obligation to pay the loan. In other contexts, the term "mortgage" will be used in its traditional sense to refer to a conditional transfer of real property to secure a loan.) The standard fixed rate thirty year mortgage was developed in part because it provided a standardized financial service product with constant monthly payments. Thus, it was cost effective for a financial service intermediary to offer its customers. It was structured to accommodate the accounting or data processing department of the bank or thrift institution as opposed to the best interest of the consumer. The mortgagor is locked in to an inflexible payment schedule which typically extends over most of the years in which he is working. This is analogous to a shoe store offering only one size and type of shoe. Under this arrangement, the shoe store realizes significant cost efficiencies at the expense of its customer's comfort.
The wide variety of individuals' financial resources and investment risk outlooks requires financial service products to be both tailored to the current needs of individuals and sufficiently flexible to accommodate future variations in their requirements. In addition, the constantly changing nature of an individual's financial circumstances, the financial markets, and the applicable income and estate tax regulations demand flexible financial service products.
Products currently offered do not take advantage of recent advances in information and problem solving technologies. Nor do they take advantage of the deregulation of the financial services industry. Moreover, financial service products do not adequately accommodate either the diversity or the constantly changing nature of individuals' financial preferences or circumstances. Financial service products are not offering the consumer a full range of financial services that would help maximize his financial return and make housing affordable to a greater number of individuals.
In addition to the failing of the financial service product offerings, there are certain fundamental problems with the methods and apparatus currently used to effect the exchange of goods and services, savings, investments and borrowing. Currently in the United States, there are 25,000 depositories and approximately 266 million individuals. Based upon an analysis made by two officials of the Federal Reserve, (Humphrey, David B. and Berger, Allen N. "Market Failure and Resource Use: Economic Incentives to Use Different Payment Instrument," 1990), approximately 97 percent of all payments are made by either cash or check, of which cash payments are 83.42 percent of the total and check transactions are equal to 14.04 percent. Credit cards account for only 1.52 percent of all transactions. Only 0.34 percent of all payments are made electronically in the United States. Clearly, the small percentage of credit card and electronic payments reveal a critical failing in the current methods employed to effect these methods of exchange.
TABLE 2-A1 __________________________________________________________________________ VOLUME, VALUE AND GROWTH OF DIFFERENT PAYMENT INSTRUMENTS Annual Growth Percentage Type of Volume Total Value Average Dollar (1986- Volume Payment (Millions) ($ trillions) Value 1987) Composition Instrument (1) (2) (3) (4) (5) __________________________________________________________________________ Nonelectronic Cash 278,600 $1.4 $5 8% 83.42% checks 47,000 55.8 1,188 5 14.07 Credit Cards 5,111 0.317 62 7 1.53 Travelers Checks 1,354 0.047 35 9 0.40 Money Orders 811 0.07 86 4 0.24 Total Nonelectronic Transfers 99.66% Electronic ACH 936 $ 3.6 $3,882 26% 0.28% Wire transfers 84 281.0 3,300,000 7 0.03 Pos 55 0.000822 15 59 0.02 ATM bill payment 29 0.002 70 3 0.01 Total Electronic Payments 0.34% __________________________________________________________________________
Cash payments total 278.6 billion transactions per year, whereas those made by check are equal to 47 billion and those made by credit card are 5.11 billion. Because of the differences in the amount of the transactions, however, there is a greater dollar value with respect to transactions made by check, as opposed to cash. There were $55.8 trillion in checking transactions as opposed to only $1.4 trillion in cash and $0.317 trillion by credit card. The average size of a check transaction is $1,188, the average size of a credit card transaction is $62 and the average size of a cash transaction is only $5.
Recent studies from the Federal Reserve Board suggest an economic rationale which explains why consumers pay by check where larger dollar amounts are involved. They stated that, because of the benefits of the "float" which approximates 3.7 days for each checking transaction, consumers and businesses have an incentive to use checks for larger transactional payments. However, another compelling reason for consumers to use checks is that consumers are afforded, albeit in an archaic manual form, a means of record keeping for their transactions that is contemporaneous with the execution of the transaction. With cash transactions, obviously, that type of convenience and contemporaneous record keeping does not occur. With regard to transactions utilizing credit cards, although one receives a piece of paper, the transactions are not incorporated into any kind of systematic accounting that is held or may be easily accessed by the consumer. It is our view that this record keeping feature makes check transactions the most significant dollar value means of exchange in the United States. When the amount of money spent matters, consumers prefer to have a record of the transaction.
TABLE 21-2 __________________________________________________________________________ USER PRICES AND SOCIAL COSTS OF DIFFERENT PAYMENT INSTRUMENTS, 1987 Float Total Social Transfer/ or Real Payment (+ Production Processing Resource for Cost, - Total User Type of Cost (Unit Cost (Unit Cost (Unit for Benefit) Changes Payment Cost) Cost) Cost) (Unit Cost) (Unit Price) Instrument (1) (2) (1) + (2) = (3) (4) (3) + (4) = (5) __________________________________________________________________________ Nonelectronic Cash $419 $10,858 $11,277 $13,283 $24,560 (0.00) (0.04) (0.04) (0.05) (0.09) Checks 1705 35,641 37,346 -39,100 -1,754 (0.04) (0.76) (0.79) (-0.83) 2,249 Credit Cards 2,257 2,249 4,506 2,257 2,249 (0.44) (0.44) (0.88) (-0.44) (0.44) Travelers 995 609 1,604 0 1,604 Checks (0.73) (0.45) (1.18) (0.00) (1.79) Money 933 518 1,451 0 1,451 Orders (1.15) (0.64) (1.79) (0.00) (1.79) Electronic ACH $0 $273 $273 -$1 $272 (0.00) (0.29) (0.29) (-0.00) (0.29) Wire 0 616 616 -2 614 transfers (0.00) (7.33) (7.33) ('10.02) (7.31) POS 0 26 26 0 26 (0.00) (0.47) (0.47) (0.00) (0.47) ATM bill 6 13 19 1 20 payment (0.21) (0.45) (0.66) (0.03) (0.69) __________________________________________________________________________ Source: Humphrey, David B. and Berger, Allen N. "Market Failure and Resource Use: Economic Incentives to Use Different Payment Instrument," i The U.S. Payment System; Efficiency, Risk and the Role of the Federal Reserve: Proceedings of a Symposium on the U.S. Payment System, Kluwer Academic Publishers, 1990.
Officials from the Federal Reserve Board have estimated the production and processing cost of cash transactions in the United States at approximately $11.27 billion. Transactions paid by check cost considerably more, $37.366 billion. Transactions paid by credit card cost $4.5 billion. This equates to a production and processing cost per transaction of $0.04 for every cash transaction, $0.79 for every transaction made by check and $0.88 for every transaction made by credit card. These cost estimates represent the direct production and processing costs that are ultimately borne by the consumer. They do not, however, include the attendant costs required for a consumer to then efficiently serve as the systems integrator for her banks, brokers, insurers and merchants. The consumer is left to aggregate disparate data from cash, check and credit card transactions into an amenable financial plan and integrate this information to satisfy annual reporting requirements such as tax returns to the treasury.
In addition to the approximately $50 billion cost of production and processing exchange transactions, currently there is no adequate means of assuring the security of transactional data, and tracking that data and compiling it for review. Credit card fraud losses are estimated to amount to $70 billion per year in the U.S. alone. Unreported cash transactions are estimated to defraud the U.S. Government of $150 billion in annual tax revenue. These annual fraud-related losses are approximately equal to the projected annual federal budget deficit. The current system of exchange and security verification revolves around the use of a social security number, name, address and credit card or checking account number. In other words, authentication of identity is almost solely based upon numeric or alphanumeric data. Once a criminal has misappropriated some or all of this data, he can effect almost any transaction and can effectively control an individual's assets, liabilities, and accounts.
Currently, there is no convenient or adequate means of tracking transactional data for consumption, savings, investments, bonuses, discounts and rebates associated with these activities. This is financially injurious to the U.S. Treasury, and it is very inconvenient for consumers. Billions of hours of citizens' time is spent compiling data for tax returns. Millions of hours of IRS officials' time is spent checking them for accuracy. James L. Payne in Costly Returns has estimated the annual cost of tax compliance in the United States alone at $360 billion. Moreover, under the current system of exchange it is impossible for economic policy makers to get an accurate real time reading on the state of the economy, and consequently, economic policy is frequently ill-timed and misguided.
Data is also not compiled and presented in a manner that allows individuals to make the appropriate informed decisions about their consumption, savings and investment behavior. This makes it difficult for consumers to properly visualize the value of their potential savings and investment. This has led to a consumption-based society with inadequate levels of personal savings, potentially resulting in disastrous long term consequences for the American economy and society at large.
Furthermore, this excessive reliance on paper-based transactional media has an adverse environmental impact and may, according to certain studies, directly contribute to global warming. There is a significant adverse environmental impact of the paper currency and paper check-based society. Credit and debit cards also generate paper and carbon based transactional reporting media. None of the current forms of exchange provide a sufficient benefit for consumers to change their modes of transactional behavior.
The current system of exchange, savings, investment and borrowing makes it very difficult to adequately manage risk exposure for and by consumers, banks, and the U.S. Government. Accordingly, each year, approximately 10 million individuals are forced to file bankruptcy; financial institutions incur substantial bad debt losses; and the U.S. government is forced to write off uncollectible tax revenues.
The aggregate production and processing cost of the current system of exchange in the United States is estimated by Federal Reserve officials to be in excess of $60 billion each year. However, as demonstrated above, the total direct and indirect social, economic and environmental costs associated with the predominantly cash and check-based current system are far greater.